Construction Loans Heading the Way of Subprime Loans

This is not good:

Like Subprime Mortgages, Some Construction Loans Are Delinquent

Like Subprime Mortgages, Some Construction Loans Are Delinquent
By FLOYD NORRIS

BANKS across the United States, particularly the smaller ones, have become dependent on construction lending just as that area of the economy is weakening and the number of bad loans is growing.

Figures compiled by the Federal Deposit Insurance Corporation and released last week show that both midsize and small banks had construction loans outstanding that were greater than their total capital. A decade ago, such loans were equal to only a third of capital for those banks.

For most of this decade, that was a good strategy. Construction loans proved to be very profitable, particularly for smaller banks as competition from larger banks and securities markets eroded their position in areas like mortgage lending and credit card issuance.

Now, however, more than 3 percent of all construction loans are classified as being nonperforming, or have borrowers that are behind on their payments. That is the highest proportion in a decade.

...

The smaller banks have eschewed many of the riskier practices of the larger national operations, but it looks like they are going to get bitten by the turndown too.